Introduction to Preference and Decision Making Psychology 466: Judgment & Decision Making Instructor: John Miyamoto 10/31/2017: Lecture 06-1 Note: This Powerpoint presentation may contain macros that I wrote to help me create the slides. The macros aren’t needed to view the slides. You can disable or delete the macros without any change to the presentation.

Where Are We in Psych 466? Rational decision making requires: Why be concerned about “rational decision making? Rational decision making requires: A definition of the decision that we are trying to make. Generating a list of options (things you can do) An evaluation of the uncertainties that are associated with our options. This includes an evaluation of risks. An evaluation of our preferences and values – How much do we want some things or how much do we want to avoid other things? Same Slide with Emphasis on Creative Aspects of Decision Making Psych 466, Miyamoto, Aut '17

Where Are We in Psych 466? Rational decision making requires: A definition of the decision that we are trying to make. Generating a list of options (things you can do) An evaluation of the uncertainties that are associated with our options. This includes an evaluation of risks. An evaluation of our preferences and values – How much do we want some things or how much do we want to avoid other things? Weak Psychological Theory & Research Same Slide with Emphasis on Uncertainty Psych 466, Miyamoto, Aut '17

Where Are We in Psych 466? Rational decision making requires: A definition of the decision that we are trying to make. Generating a list of options (things you can do) An evaluation of the uncertainties that are associated with our options. This includes an evaluation of risks. An evaluation of our preferences and values – How much do we want some things or how much do we want to avoid other things? Extensive Theory & Research Same Slide with Emphasis on Preference and Value Psych 466, Miyamoto, Aut '17

Where Are We in Psych 466? Rational decision making requires: A definition of the decision that we are trying to make. Generating a list of options (things you can do) An evaluation of the uncertainties that are associated with our options. This includes an evaluation of risks. An evaluation of our preferences and values – How much do we want some things or how much do we want to avoid other things? Extensive Theory & Research Same Slide without any Emphasis Rectangles Psych 466, Miyamoto, Aut '17

Where Are We in Psych 466? Rational decision making requires: A definition of the decision that we are trying to make. Generating a list of options (things you can do) An evaluation of the uncertainties that are associated with our options. This includes an evaluation of risks. An evaluation of our preferences and values – How much do we want some things or how much do we want to avoid other things? 8 Elements of Smart Choices Psych 466, Miyamoto, Aut '17

Outline: The Eight Elements of Smart Choices Problem Objectives Alternatives Consequences Tradeoffs Uncertainty Risk Tolerance Linked Decisions Alternatives Consequences Tradeoffs Objectives Problem PrOACT Intro to the Study of Preference Psych 466, Miyamoto, Aut '17

Introduction to the Study of Preference The study of preference is primarily the study of: how people make choices between alternatives, objects or options, and ... how people evaluate the attractiveness/unattractiveness of options -------------------------------------------------------- What is NOT emphasized in the psychology of decision making: How people create a mental representation of the decision problem. (Problem definition) How people generate the alternatives (options) is not usually studied. (Identifying the alternatives) Everyone would agree that these are important issues, but psychologists haven’t discovered a good way to study imagination, creativity and discovery. Overview of Lecture Psych 466, Miyamoto, Aut '17

Overview Riskless preference Risky choice / decision under risk Some examples of theories of riskless preference -------------------------------------------------------------------------- Preference under risk Heuristic choice strategies Basic concepts of preference theory Psych 466, Miyamoto, Aut '17

Basic Concepts of Preference Theory Preferential choice: Choosing among options, objects, choices, actions. Decision making: Define objectives, define alternatives, evaluate alternatives, choose among alternatives. Judgment: Evaluating an object, alternative, possibility, or option on a single dimension. Examples of Judgments: How likely is the event X? How desirable is a specific option, e.g., an invitation to go to a movie? How much do you approve of Barack Obama’s policies? How much would you be willing to pay for this house? What price should you ask for this house that you are selling? More Basic Concepts Psych 466, Miyamoto, Aut '17

Basic Concepts (cont.) Decision making under certainty. Riskless choice. Example: Which do you prefer, apple pie or pumpkin pie? Example: Which do you prefer, receiving a specific pair of shoes or a specific new hat? Decision making under risk: Probabilities of the possible outcomes are known. Example: Which do you prefer, Option A or Option B? Option A: Throw a fair die. Win $50 if 1 or 2. Lose $10 if 3, 4, 5, or 6. Option B: Throw a fair die. Win $100 if 1. Lose $20 if 2, 3, 4, 5, or 6. Example: Which do you prefer (if you have coronary artery disease)? Option A: Receive treatment by angiography with a 99% survival chance; Option B: Receive treatment by surgery with a 97% survival chance. Decision making under uncertainty: Probabilities of the possible outcomes are not explicitly stated. (See next slide for examples) Basic Concepts (cont.) Psych 466, Miyamoto, Aut '17

Basic Concepts (cont.) Decision making under certainty. Riskless choice. Decision making under risk: Probabilities of the possible outcomes is known. Decision making under uncertainty: Probabilities of the possible outcomes are not explicitly stated. Example: You must choose between surgery or chemotherapy for cancer. The doctor can make an educated guess about the chances of recovery and symptom improvement, but these chances are not known with high accuracy from medical data. Example: You must decide whether to commit to a Christmas skiing vacation now. You can make an educated guess about skiing conditions, but the chances of good conditions are just an guess. Terminology in Decision Making Theory Psych 466, Miyamoto, Aut '17

Terminology Decision maker (DM): Person making a choice or decision Bold-face words are emphasized in Psych 466 Decision maker (DM): Person making a choice or decision Value: Subjective value of an object or outcome. Utility: Subjective measure of the desirabililty/undesirability of objects and outcomes. Utility is a special case of value. We speak of the "utility" of an object or outcome if its desirability is measured in a specific way that is defined in the theory of expected utility. Objects of choice (what you choose between): Alternatives, options, choices, actions. The outcomes that you experience: Outcomes or objects or consequences. Aspects of the objects: Attributes, aspects, features. Exception: “Value” refers to subjective value, but “expected value” refers to the average of the objective outcome, i.e., the long-run average money received if you play a particular gamble is the expected value of the gamble. Examples of Alternatives & Outcomes Psych 466, Miyamoto, Aut '17

Example of Alternatives & Outcomes EXAMPLE: You must choose between seeing movie X or going to a sports event Y. Alternatives: See movie X; go to sports event Y. Outcomes if you choose movie X: Outcome 1: Movie was good, made me sad, audience was noisy; Outcome 2: Movie was mediocre, I was bored and tired; Outcome 3: Movie was great, I laughed a lot, etc. .... (more possible outcomes) .... Outcomes if you choose sports event Y: Outcome 1: Event was exciting, my team lost, I was angry & sad; Outcome 2: Event was boring, my team won, I was mildly happy; .... (more possible outcomes) .... Examples of Attributes Psych 466, Miyamoto, Aut '17

Examples of Attributes EXAMPLE: You must choose between seeing a specific movie X or going to a specific sports event Y. Alternatives: See movie X; go to sports event Y. Outcomes if you choose movie X: Outcome 1: Movie was good, made me sad, audience was noisy; Outcome 2: Movie was mediocre, I was bored and tired; Outcome 3: Movie was great, I laughed a lot, etc.; .... (more possible outcomes) .... Outcomes if you choose sports event Y: Outcome 1: Event was exciting, my team lost, I was angry & sad; Outcome 2: Event was boring, my team won, I was mildly happy; .... (more possible outcomes) .... Attributes of movie outcomes: (i) acting quality; (ii) story quality; (iii) emotional impact; (iv) companion quality; etc. Attributes of sports outcomes: (i) level of excitement or interest; (ii) emotional impact; (iii) weather; etc.; (iv) companion quality; etc. Outline of Heuristic Choice Strategies Psych 466, Miyamoto, Aut '17

Outline Of Heuristic Choice Strategies Articulated values and constructed values Belief sampling model for evaluative judgments or choices Comparison of choice strategies Expected Utility (EU) Theory Allais Paradox Explanations for the Allais Paradox Lecture ends here Construction of Values Psych 466, Miyamoto, Aut '17

The Construction of Values File cabinet analogy for values: Look up the value of something in your mental file cabinet. Example: Should you spend $400 on a very good weekend ski trip? Look up your subjective value for $400 and for the ski trip. Choose the one that has the higher value. Fischhoff: The philosophy of articulated values (Economists like this idea; psychologists not so much) Alternative view: Values are a mental construction. People construct values “on the fly” from basic values + cognitive procedures for constructing values Which view is correct depends on habits of valuing – we have lots of experience deciding the value of some things, but not other things. The philosophy of articulated values assumes that values all possibilities are already constructed and stored in a mental file cabinet. All we have to do is look up these values when we need them. Basic values + cognitive procedures for constructing values: When we need to decide how much we value something, e.g., a ski weekend, we construct the value of this alternative. Value construction is context sensitive. Belief Sampling Model Psych 466, Miyamoto, Aut '17

Fig. 9.4: Belief Sampling Model for Evaluative Judgments (Tourangau, Rips & Rasinski, 2000) COMPREHENSION A situation, event or question prompts an evaluative judgment. RETRIEVAL Memories, images, & feelings are sampled from long-term memory. JUDGMENT A global summary evaluation is inferred from the sampled beliefs RESPONSE An appropriate response is generated, e.g., a choice, or evaluative judgment, or an action. . Psych 466, Miyamoto, Aut '17 Same Slide with Reciprocal Arrows

JM's Revision of the Belief Sampling Model for Evaluative Judgments COMPREHENSION A situation, event or question prompts an evaluative judgment. RETRIEVAL Memories, images, & feelings are sampled from long-term memory. Reciprocal arrows is more realistic than down arrows only. JUDGMENT A global summary evaluation is inferred from the sampled beliefs RESPONSE An appropriate response is generated, e.g., a choice, or evaluative judgment, or an action. . Psych 466, Miyamoto, Aut '17 Figure 10.1: Major Choice Strategies

Hastie & Dawes, Figure 10.1: Major Choice Strategies Figure 11.2 shows major choice strategies for constructing values, i.e., given that we have to make a choice, what are strategies for making a choice? Next we will explain different aspects of this table. A better name for "whole versus part" (column 4) would be “By Alternative versus By Attribute." Example: Choosing an Apartment Psych 466, Miyamoto, Aut '17

Example: Choosing an Apartment Assume that you only care about 4 attributes: Price, Location, Size, Attractiveness * These three models will illustrate the Three Choice Strategies – Illustration of Characteristics of Choice Strategies Psych 466, Miyamoto, Aut '17

Example: Choosing an Apartment (cont.) We will consider 3 models. Additive linear model (a.k.a. multiattribute utility theory or MAUT model) Satisficing model Lexicographic model These 3 models will illustrate the aspects noted in the preceding table: Amount of Mental Effort Compensatory vs Noncompensatory? Whole vs Part? (By Alternative vs By Attribute) Is the Strategy Exhaustive? * These three models will illustrate the Psych 466, Miyamoto, Aut '17 Lexicographic Strategy

Lexicographic Strategy Step 1: Prioritize the attributes. E.g., (1) Price, (2) Size, (3) Attractiveness, (4) Location Step 2: Choose the alternative that is best on attribute 1 (price); Step 3: If several alternatives are tied on attribute 1, choose the alternative that is best on attribute 2 (size) Step 4: If several alternatives are tied as the best on attributes 1 and 2, choose the alternative that is best on attribute 3 (attractiveness). Step 5: If several alternatives are tied as the best on attributes 1, 2 and 3, choose the alternative that is best on attribute 4 (location). Step 6: If several alternatives are tied on all attributes, pick at random. Application of Lexicographic Strategy to Apartment Choice Psych 466, Miyamoto, Aut '17

Example: Lexicographic Strategy for Choosing an Apartment Attribute Priority Order: (1) Price, (2) Size, (3) Attractiveness, (4) Location Step 1: Eliminate Apt B because it is inferior on price. Retain Apt A and C because they are tied on price. Step 2: Eliminate Apt A because it is inferior on size. Apt C is the choice (unless there are other apartments not listed in the table). Characteristics of Lexicographic Strategy Psych 466, Miyamoto, Aut '17

Figure 10.1 – just the part for the lexicographic strategy Attribute Priority Order: (1) Price, (2) Size, (3) Attractiveness, (4) Location Mental Effort – medium. Pretty obvious what this means. You only have to consider one attribute at a time. Noncompensatory – improvements on one attribute do not compensate for deficiencies on another attributes. If Apt B has a worse price than another option, you will not choose it no matter how good it is on size, attractiveness and location. Explain Whole/Part & Exhaustive Columns of the Table Psych 466, Miyamoto, Aut '17

Figure 10.1 – just the part for the lexicographic strategy Attribute Priority Order: (1) Price, (2) Size, (3) Attractiveness, (4) Location Mental Effort – medium. Noncompensatory - no tradeoffs allowed. Inferiority on one attribute cannot be compensated for by large superiority on other attributes. Whole vs Part = Attribute. This means that you consider each attribute one at a time (as opposed to making a wholistic judgment about a single alternative). Not exhaustive because you do not consider all attributes when making the choice. Psych 466, Miyamoto, Aut '17 Critique of Lexicographic Strategy

Critique of the Lexicographic Strategy in Apartment Choice Lexicographic Strategy. Prioritize the attributes in the order: Price, Size, Attractiveness, Location. If there are many apartments, what are the flaws in this strategy? What are its strengths? Flaws: Noncompensatory strategy prevents the DM from making tradeoffs. Satisficing Strategy Psych 466, Miyamoto, Aut '17

Satisficing Strategy Step 1: Set an "acceptability" level on every attribute. Price: Less than $650 Location: Less than 8 miles Size: At least 500 square feet Attractiveness: At least a 4 on a 10 point scale. Step 2: Keep all the alternatives that are better than the acceptable level on every attribute. Drop any alternative that fails to be acceptable on any attribute. In the end, satisficing yields a set of acceptable alternatives. You still need some other strategy for choosing among them, like choosing at random. Satisficing makes most sense in a sequential choice where you examine one item at a time. The search stops as soon as you find one item that is acceptable on every attribute. Application of Satisficing to Apartment Choice Psych 466, Miyamoto, Aut '17

Example: Satisficing When Choosing an Apartment "Acceptability" levels Price: Less than $650 Location: Less than 8 miles Size: At least 500 square feet Attractiveness: At least a 6 on a 10 point scale. In this case, satisficing leads to a choice of Apt C, but in some cases, it might not lead to a choice, or it might lead to a choice that is suboptimal (not the best). * These three models will illustrate the Characteristics of Satisficing Strategy Psych 466, Miyamoto, Aut '17

Figure 10.1 – just the part for the Satisficing Strategy Mental effort is low. You just need to set acceptability levels for every attribute. Noncompensatory: If an alternative is unacceptable on one attribute, no amount of improvement on another attribute will make it acceptable overall. Whole vs Part: Alternative. You can make a decision about each alternative (alternative) one at a time. Exhaustive: No, because you can stop searching as soon as you find an alternative that is "good enough" on every attribute. Psych 466, Miyamoto, Aut '17 Critique of Satisficing Strategy

Critique of the Satisficing Strategy for Choosing an Apartment Acceptability Levels: . Price: Less than $650 Location: Less than 8 miles Size: At least 500 square feet Attractiveness: At least a 6 on a 10 point scale. What are the strengths and weaknesses of this strategy? Flaws: Noncompensatory strategy prevents the DM from making tradeoffs. If 2 apartments are both better than the acceptable level on location, then it doesn’t matter if one apartment is 1 mile away and another apartment is 7 miles away – they are both equally good on this attribute. Strength: It is a fast and easy way to make a decision. Additive Linear Strategy Psych 466, Miyamoto, Aut '17

Additive Linear Model (MAUT = Multiattribute Utility Theory Model) Step 1: Convert all attribute scores to z-scores. Step 2: Assign weights to the attributes according to how important they are to you. Step 3: For each alternative, compute the sum of the attribute z-scores weighted by the importance weights. Step 4: Choose the alternative with the highest combined score. This method was easy to apply if you use pencil and paper or a computer. Not easy to apply if you must perform a mental calculation. Application of Linear Model to Apartment Choice Psych 466, Miyamoto, Aut '17

Additive Linear Model, Step 1: Convert to Z Scores Compute Z-Scores Continuation of Application of Linear Model to Apartment Choice Psych 466, Miyamoto, Aut '17

Additive Linear Model: Steps 2 & 3 Assign importance weights to attributes Price: 2.5 Location: 1.0 Size: 0.65 Attractiveness: 0.80 Compute utility of each apartment: Utility of Apt A = 2.5*(0.08) + 1.0*(-0.09) + 0.65*(-0.83) + 0.80*(0.01) = -0.42 Utility of Apt B = 2.5*(-0.77) + 1.0*(1.53) + 0.65*(1.04) + +.80*(0.93) = 1.03 Utility of Apt C = 2.5*(0.08) + 1.0*(0.02) + 0.65*(1.84) + 0.80*(0.72) = 1.99 Conclusion: Choose Apt C Characteristics of Additive Linear Model Psych 466, Miyamoto, Aut '17

Figure 10.1 – just the part for the Additive Linear Model Mental effort is very high (if all calculations are performed in one's head) Compensatory: Improvements on one attribute can compensate for deficiencies on other attributes. Whole vs Part: Alternative. We can compute the utility of each alternative one at a time. Exhaustive: Yes. All attributes and all alternatives are considered. Critique of the Additive Linear Model Psych 466, Miyamoto, Aut '17

Critique of the Additive Linear Strategy in Apartment Choice Importance weights: Price = 2.5; Location = 1.0; Size = 0.65; Attractiveness = 0.80 Utility = 2.5*ZPrice + 1.0*ZLocation + 0.65*ZSize + 0.80*ZAttractiveness If there are many apartments, what are the flaws in this strategy? What are its strengths? Flaws: Flaw: It takes a great deal of time and effort. Strength: If you have the time and are willing to make the effort, it will produce the best choice. Return to Hastie & Dawes Fig. 10.1: Table of Choice Strategies Psych 466, Miyamoto, Aut '17

Hastie & Dawes, Figure 10.1: Major Choice Strategies Figure 11.2 shows major choice strategies for constructing values, i.e., given that we have to make a choice, what are strategies for making a choice? Next we will explain different aspects of this table. A better name for "whole versus part" (column 4) would be "by alternative versus by attribute." Briefly Describe the Strategies that were Not Emphasized in this Lecture Psych 466, Miyamoto, Aut '17

Briefly Describe Strategies that Were Not Emphasized in this Lecture Figure 11.2 shows major choice strategies for constructing values, i.e., given that we have to make a choice, what are strategies for making a choice? Next we will explain different aspects of this table. Summary: Characteristics of Different Choice Strategies Psych 466, Miyamoto, Aut '17

Characteristics of Choice Strategies Different Requirements for Mental Effort Some choice strategies require a lot of mental effort (linear additive model), and others require less mental effort (lexicographic or satisficing strategies). Compensatory vs Noncompensatory Strategy: A strategy is compensatory if deficiencies on some attributes can be compensated for by strengths on other attributes. Whole vs Part (better name: By Alternative vs By Attribute) If processing is by alternative, processing of one alternative is completed before the processing of another alternative is begun. If processing is by attribute, processing of one attribute is completed before the processing of another attribute is begun. Exhaustive or Not Exhaustive: Exhaustive: All attributes and all alternatives are fully processed before a judgment or decision is made. Strengths & Weaknesses of Different Choice Strategies Psych 466, Miyamoto, Aut '17

Strengths & Weaknesses of Different Choice Strategies If you have lots of time and effort, the linear additive strategy and the additive difference strategy will perform best. In many contexts, simpler strategies perform almost as well and take less time and effort. Evidence suggests that people shift from simpler to more complex strategies if they become more motivated. Some evidence suggests that people shift from more complex to simpler strategies when they make decisions under time pressure. Don't forget Gigerenzer & Brighton's critique of the assumption that there is always an accuracy/effort tradeoff. END – Or Time Permitting, Explain Lexicographic Semiorder Decision Rule Psych 466, Miyamoto, Aut '17

Set Up for Instructor Turn off your cell phone. Close web browsers if they are not needed. Classroom Support Services (CSS), 35 Kane Hall, 206-543-9900 If the display is odd, try setting your resolution to 1024 by 768 Run Powerpoint. For most reliable start up: Start laptop & projector before connecting them together If necessary, reboot the laptop Psych 466, Miyamoto, Aut '17